Key yearend tax tips

There are several tax-planning strategies that you and your clients should consider – from crystallizing capital gains and losses to maximizing charitable donations and TFSAs – as the end of 2018 approaches

It’s never too early to get started on yearend tax planning. In fact, talking to your clients well before Dec. 31 just makes sense.

“If you’re doing this at the end of the year, it’s going to be more difficult for you and even more difficult for the client,” says Blair Evans, director, tax and estate planning, with Investors Group Inc. in Winnipeg.

Of course, speaking with your clients throughout the year about tax planning will help ensure they don’t lose out on tax-saving opportunities.

“There’s very little you can do to save taxes when you’re actually sitting down [with clients in the spring] to file their tax returns from [the previous] year,” says Jamie Golombek, managing director of tax and estate planning with Canadian Imperial Bank of Commerce’s financial planning and advice group in Toronto.

Here are a few key tax-planning tips for you and your clients to consider as the end of 2018 approaches:

– Review capital gains and losses. Going over your clients’ portfolios to identify investments that have achieved significant gains or losses is a good idea to do in the latter part of the year, Evans says.

Selling investments with capital losses before yearend allows your clients to offset capital gains realized elsewhere within a portfolio. Net capital losses that aren’t used for the 2018 taxation year can be carried back three years or carried forward to any future taxation year to offset net capital gains.

However, any tax-planning considerations should always be placed in context of broader investment goals, Evans says: “Tax should not be the foremost concern.”

If a decision to sell an investment that has experienced a significant loss already has been made, Evans adds, “accelerating [that decision] and selling in 2018 may make sense” to take advantage of the tax-planning opportunity.

Dec. 27 is the last day for trading securities that can be settled on Dec. 31.

– Discuss charitable donations.

Gifts to registered charities allow your clients to take advantage of donation tax credits at both the federal and provincial levels, which lead to tax savings.

“The one [tax tip] that we’re always reminding people of is charitable donations,” says Abby Kassar, vice president, high net-worth planning services, with Royal Bank of Canada’s wealth-management division in Toronto.

Donating gifts of publicly traded securities, such as stocks or mutual funds, that have appreciated in value can lead to significant tax savings, Kassar says. That’s because the donor receives a tax receipt for the value of the “in kind” donation, against which a donation tax credit can be claimed, and the capital gain on the value of the donated security is eliminated as well, thus saving taxes.

Clients also could consider setting up a donor-advised fund, which provides an effective way to make donations to various charities, Golombek says; such trusts are relatively straightforward to establish. You can have conversations with clients about donor-advised funds throughout the year.

“Some [clients] are not aware [of donor-advised funds] and those who are think they’re too complicated,” Golombek says. “But when I show [clients] that they can be saving up to 26% on taxes on their capital gains, depending on their province or territory, they get very interested.”

The deadline for making charitable donations for the 2018 taxation year is Dec. 31.

– Note the TFSA deadline. If your clients are considering making withdrawals from their TFSAs soon, they should be advised that doing so before the end of the current year, rather than early in the next year, is always preferable. That’s because an amount equal to the amount withdrawn from a TFSA is added to the accountholder’s contribution room for the following taxation year – as long as the withdrawal in question wasn’t made to correct an overcontribution. Withdrawing money from a TFSA before the end of the year gives clients the flexibility to contribute to their accounts as early as January of the new year, maximizing tax-sheltered growth.

If you have a new client who has never contributed to a TFSA and who was 18 or older in 2009, he or she has built up cumulative contribution room of $57,500 as of 2018. (The federal government has yet to announce the annual TFSA contribution limit for 2019; the limit may rise to $6,000 for 2019 from $5,500.)

– Keep a record of expenses. If you plan to deduct business expenses for your financial advisory business for the 2018 taxation year, you need to make sure the amounts are reasonable and that you have proper documentation to back up any claimed expenses. Failure to do so can lead to big problems with the tax authorities.

“The [Canada Revenue Agency] can come back, disallow the expenses and you can end up spending a lot of time fighting it,” Golombek says.

For example, you should keep detailed travel logs of when you visit clients if you plan to claim your vehicle as an expense, Golombek says. Similarly, if you plan to claim meals or entertainment as an expense, you need to keep proper documentation.